Netflix Chief Dogged By Miscues But Still Counting The Stock Profits

It's been a tough few days since CEO Reed Hastings apologized to his angered customers; now Wall Street pundits are questioning the stock gains he made while other investors suffered

Even as the once-beloved red envelope that perfectly symbolized the convenience of Netflix’s video service is reduced to tatters in its customers' eyes, Wall Street pundits have begun sounding alarms about  CEO Reed Hastings' profit-taking windfall.

As the Wall Street Journal pithily remarked about the service's now-shrinking consumer base, “If the CEO of Netflix Inc. were in a movie, the townspeople would be chasing him with torches and pitchforks.”

Also read: Netflix's Qwikster Move: Hard-Headed Business, Not Greed

To adopt that metaphor to Wall Street’s view of recent Netflix history, the most knowledgeable townspeople are holding a lantern close to Hastings’  apparently legal but somehow discouraging practice of regularly unloading chunks of his own Netflix holdings — and apparently finding some witchcraft afoot. What was once just scuttlebutt — complaints about the CEO’s profit-taking when the company’s share price was still elevated, before the recent dismaying announcements — is now the stuff of articles in places like the Journal and the web site Seeking Alpha.

Hastings has long sold shares under the SEC’s 105b provisions, designed to insulate insiders from their own divestitures of company stock, so  it’s unlikely even the harshest critics would accuse him of insider trading. Shareholders who have been riding out the more recent tumble might wish they’d been  part of the regular dumping plan.  

At the same time, the company has been buying back its own stock in recent months. Depending on underlying circumstances, that could increase shareholder confidence or look like putting lipstick on a pig.

The Wall Street Journal’s Brett Arends wrote

“In the first two quarters of this year, Netflix spent $160 million of stockholders’ cash buying in shares at an average price of $222. So far investors have lost $47 million on that deal.  Who benefited? Anyone selling stock during that period. Prominent among them is Reed Hastings…according to an analysis of public filings by InsiderScore, he’s cashed out about $41 million since, at an average price of $236. In other words, by curious coincidence, the profits he’s made selling this stock are almost as much as the company has lost buying it.”

Tony Wible, an analyst with Janney Montgomery Scott, framed it this way, albeit with some exaggeration: “Reed is selling options on a weekly basis. You have to ask yourself, it these are the smartest guys in the room, why doesn’t the co-founder own any shares?”

Netflix shares have slumped some 38 percent since Netflix downsized its subscriber forecast on Sept. 15.

On Wednesday, at a conference hosted by Goldman Sachs, it was chief financial officer David Wells’ turn to be queried not about dumping shares but the company’s bifurcation of its businesses. He admitted to being “humbled” by the reaction that saw the service shed a million subscribers in a few days.

“We’ve ruffled a lot of feathers,” Wells admitted, but added that the company’s response would not be to roll back the price increase (in some cases as much as 60 percent), even temporarily, as that would merely be “kicking the can down the road.”

Wells addressed the recent loss of content, notably due to an expiring Starz deal. (Though he was able to report the extension and expansion of a licensing accord with Discovery Communications.)

And yet the company is in sore need of more content on the streaming side. While the undisclosed inventory of physical DVD’s has been estimated by Wedbush Securities analyst Michael Pachter at around 100,000 titles, the streaming library has hovered around 20,000 titles.

Wells had other more upbeat news to discuss, including the revelation that most of Netflix’s future content deals will be for television shows rather than movies, and that the company may also spend 15 percent of its budget on original programming.

Wells added that Netflix plans to add social-networking features to its video service. A New York Post report said that Facebook Inc. may announce partnerships with Netflix and the competing Hulu LLC.  

Street naysayers aside, a number of observers saw wisdom in splitting the businesses, given the logic Wells pointed out — the company is determined to keep the faltering DVD business focused on operating margins while the online business will push for subscriber growth.

Ultimately, Netflix’s ability to rebound going forward may depend in large part on how it handles its PR issues. 

“The issues arise from the communication around the strategy and the naming of the brand. The initial announcement of the cost hike and terms changes was poorly done — it took their customers for granted, Netflix announced in an arrogant take-it-or-leave-it style," said Howard Belk, co-president and CEO of  the global strategic branding firm  Siegel + Gale.

“It was shocking. People had this affinity for the brand, they felt like they had helped build it and felt part of it, and all of a sudden they were being treated like a commodity.”